The Realty Bet

April 2016

Is 2016 going to be a reprise of 2008 for the UAE real estate market, or a turnaround is in the offing? Sunil Kumar Singh tries to explore

There’s been lots of talk going around UAE property market ‘slowdown’ — from buyers/investors singing the blues, speculations about things going from bad to worse, to likening current market conditions to those of 2008, among others. Isn’t the slowdown much hyped? Following a flurry of noisy and negative gyrations going nowhere, several recent trends reiterate that the fundamentals of the real estate market are being overlooked or misinterpreted. Despite talk of gloom, however, there’re reasons to believe the property market remains resilient.
The market seems to be in for a quiet year and many suppose because there was a rush into property a few years back, it can be unsettling to see the market going through bouts of volatility. But that’s because the market has now settled into a steadier, less-spectacular groove, and surely, the current situation cannot be likened to the tough realty market of 2008-09, when the global financial crises hit the region.

The Two-Speed Market
The gulf in property values and rentals had widened last year in the UAE, especially Dubai which, of late, is showing signs of narrowing. The latest trend is the softening of the asking rents in many micro markets of Dubai.

“As of Q4 last year, median asking rents were 2.3% less than the quarter prior to it, 5% less than Q4 2014 and 10.4% less than the same period two years ago. This can be explained by analysing at the new supply coming online in some locations, providing more options for tenants, and by the long vacancy periods some landlords initially opted for to secure higher income, then realizing that a slightly lower asking rent would reduce the vacancy,” reasons Haider Tuaima, Head of Research at ValuStrat.

A recent report by Emirates NBD ‘Dubai Real Estate Update: Feb 2016’ also confirms that the pace of the price decline in Dubai’s residential sector is stabilizing in Feb 2016. Residential property prices have remained relatively unchanged in February 2016 with apartment prices down -12.1% y/y and villa prices down -10.9% y/y, according to Phidar Advisory’s Dubai 9/5 House Price Index, which is based on Dubai Land Department (DLD) data but includes only nine apartment communities and five villa communities in investor zones in Dubai, the report said. Apartments account for about 90% of residential real estate transactions in Dubai.

The luxury (premium) segment in the villas sector was more resilient at -9.1% y/y while the standard segment of the apartments sector also softened at -7.6% y/y in February 2016. The strength of the US Dollar is a constraint on demand, particularly for foreign investors, while low oil prices continue to weigh on sentiment.

Not So Affordable After All
Since the introduction of the regulations on mortgage lending by the UAE Central Bank in October 2013, the issue of affordable housing has been hogging the limelight with many developers coming up with projects labelled as being “affordable”. But is that really so?

“Despite attempts by Dubai Municipality to create designated affordable housing quarters in the city, this is yet to take off enmasse and remains a vastly underserved segment of the market. In order to help drive developer interest, aside from prescriptive legislation on quotas for affordable housing, the authorities need to formalize the definition of affordable housing; not only in terms of those who could potentially qualify, but also the type of housing stock that needs to be created to help Dubai remain competitive and attractive to all income brackets,” notes a report by Cluttons.

“The formalisation of an affordable housing asset class,” it added, “would go a long way to help create and nurture a new property market segment, while at the same time providing a new route to ownership for aspiring households.”

Fred Durie, CEO of Nshama, a Dubai-based private developer, explains the maths behind affordability, “The UAE has over 820,000 middle-income households representing about 40% of all households in the country. By definition, affordable housing must not cost more than 30% of the gross household incomes for households earning between AED 10,000 to AED 30,000 per month.”

“From market trends, we have observed that Dubai’s property sector is maturing, and there is clear demand for end-use homes,” he adds while underscoring the need to build houses for mid-to-low income bracket earning between AED 12000-25000 per month to drive Dubai property growth to the next level.

Concurring with Durie is John Stevens, Managing Director of real estate services company Asteco, who says, “We are currently witnessing buyer preference focused on more affordable mid-market products as evidenced by the take-up iin recent launches targeting this market segment, this is the combination of an affordable price tag and attractive payment plans offered by developers.”

Find Good Reasons To Buy Off-Plan
Off-plan properties became popular during the height of the property boom in Dubai in 2005-06. But the buyers of these properties were also among the worst hit when the market fell sharply in 2008-09. However, now as developers are seeing off plan sales making a comeback, this naturally raises the question around the risks involved from an investor’s perspective. Experts say, off-plan properties traditionally attract a higher percentage of investors and speculators than end-users when there are ample finished properties available for sale in the market.

“Across the UAE, the rental market shows stability and therefore demand is still strong from investors for off-plan properties who are looking at procuring assets which yield a good return on investment,” maintains Stevens of Asteco. He cutions that there is still interest from bullish long-term speculators (as opposed to quick flippers) to invest in off-plan properties, as they believe that property prices will continue to rise over the next few years, thereby delivering them capital growth on their investments.

A Tale of Two Cities
While residential sales in Dubai last year recorded across-the-board declines, with villa sales prices down year-on-year by 11% and apartments by 8%, in Abu Dhabi saw apartment rental rates increase, on average, by 5%, with prime projects achieving up to 10% growth, and 3-4% growth for apartment sales prices, as per Asteco figures.

Industry experts have also declared the new property law will benefit Abu Dhabi’s real estate growth. Abu Dhabi’s new Property Law No. (3) of 2015 took effect in January this year. Chris Taylor, CEO of Abu Dhabi Finance, is confident that recent legal and economic developments in the capital will bring best practice into the capital’s real estate, with numerous factors contributing to buyers’ security and subsequently enhancing growth.

There’s one more difference. Unlike Abu Dhabi, in Dubai the pipeline of supply is massive as many projects having been announced in the last couple of years. As Sameh Muhtadi, CEO of Abu Dhabi-based Bloom Holding, explains, “. An estimate of up to 50,000 units is in the pipeline for delivery in the next 3-4 years. On the contrary, the Abu Dhabi property market doesn’t have a supply overhang. In fact, the market has a scarcity of supply, both on the sales as well as leasing fronts.”

Wrapping up, UAE’s, and especially Dubai’s property prices are expected to rise as growth returns. There’s a broad-based real estate pullback, with prices correcting in many areas but things are stabilizing now. The drivers for this slowdown are a mix of supply-side factors and demand-side factors, but there’re signs that the upside will finally unravel. The odds of a further price correction is remote, unless black Swan events take place that are almost impossible to predict.

Ahmad Al Matrooshi, Managing Director, Emaar Properties, sums it up like this, “Dubai’s property sector has evolved significantly over the past few years and is today a maturing market with strong demand from end-user investors. The core economic sectors of Dubai including tourism, retail and hospitality are performing well. The ongoing preparations for Expo 2020 Dubai and the infrastructure projects being developed continue to attract professionals from around the world, in turn benefiting the real estate market. The various measures undertaken by the government authorities have strengthened the property sector. Flipping, a practice that fueled concerns in the past, has been curbed. Apart from governmental regulations, Emaar has also introduced several measures in place to protect the long-term interests of investors and to prevent unhealthy speculation.”

In a nutshell, in a property market going through speed bumps get your ducks in a row before you make decision to buy or rent.